It was only a decade ago when thousands of contracting companies were forced to close their doors and tens-of-thousands of contractors faced layoffs. Ten years later construction companies are finally picking up the pieces and spending has reached pre-recession heights.
CNBC reported that by the end of 2016, construction spending in the US had reached its highest level since April 2006.
With all this excitement, now might seem like the most opportune time to start up or expand your contracting company. But not so fast. To run a successful contracting business, you need to understand how credit will impact your firm and that the construction industry is propelled by credit.
There are many reasons that credit-worthiness has a direct impact on contractors
Contractors often only get paid a percentage of their contracted total upon beginning work on a project, total compensation gradually comes in as the work is underway. But, like any other business, they have payroll, equipment/supply purchases, and other fixed expenses that must be paid whether clients pay on time. Which makes affordable lines of credit, revolving credit, and business loans very valuable to contractors to maintain a steady cash flow.
There are a few different types of construction bonds. They are common in the construction industry and are often required by state law for a business to operate legally. Bonds are issued as a form of protection for the project owner or investor from unforeseen financial issues that may arise before the project’s completion. If your industry requires a surety bond you will need to maintain healthy credit scores and reports. When a contractor applies for a bond they will have their business and possibly (the principals) personal credit pulled to determine their risk of paying back if there should be a claim. Costs increase enormously as a percentage of the bond when credit is less than the threshold needed.
Several types of insurance policies will likely be required to operate in the construction industry; worker’s compensation, general liability, property and vehicle insurance, to name a few. In order to gain approval for affordable insurance premiums with your preferred provider, contractors need strong business credit scores and profiles to be considered a low risk. A mid-size business with a fleet, property, and general liability, will need a significant amount of protection and will want to maintain healthy credit to secure affordable policies. Pricing increases enormously when credit reflects a higher risk.
Loans / lines of credit / leases
Construction companies need access to affordable business loans, lines of credit, and leases for purchasing or renting equipment and must qualify for ideal payment terms with vendors and suppliers. Fees and interest could increase dramatically if credit is poor.
Bids & partnerships
Whether you’re bidding for a job with the federal government or looking to establish a new partnership, your business credit scores should represent a financially healthy business with responsible payment habits.
Some companies that have excellent Dun & Bradstreet credit profiles use it as a selling point. They post their Duns # on their website or make it publicly available, sending a message of transparency and showing a level of sophistication to the viewer.
Take charge of managing & monitoring each business report
One of the biggest mistakes that businesses make, is neglecting their credit or viewing it sporadically. Business credit is an open book; any interested party can look at your credit health before choosing to work with you. Even your competitors can review your business credit. Unlike personal credit, no approval or even notification, is required to pull business reports. This makes companies vulnerable and increases the likelihood of missed profitable opportunities and can scar reputations.
Monitor customer credit profiles daily
Interested parties will review you reports and you should be doing the same.
Before you commit to a business arraignment with another company, you will want to protect yourself by researching the payment habits and creditworthiness of your potential customers. By limiting the likelihood of doing business with a high-risk company who has a track record of paying late or not at all, you are protecting your business now and in the future.
What to look for on reports
When you’re monitoring reports or viewing customer reports, there are several indicators that you should look out for:
- Size of the company: In order to have a successful partnership, the business needs to have enough in-house resources to handle the project.
- Delinquencies: Are there late payments reporting, how far behind are they, and what is the balance due?
- Do they have tax liens, bankruptcies, or collections reporting?
- Do they have a variety of trade lines and creditors with lengthy good payments history?
When monitoring your own business credit reports make sure to review that all the information is correct. Your company information is often pulled from public record and does have an impact on scores.
If you notice inaccurate or derogatory information, seek out advisement from a business credit expert in order to learn what can be done to restore the profiles.
As a construction professional, it’s important that you understand the impact poor or limited credit can have on your businesses reputation. This starts by doing research, educating yourself, monitoring reports, and reaching out for guidance.